Resilient portfolio
? 2H/FY21 DPU of 2.80/5.43 pence, is within expectations, at 51.4%/99.7% of our FY21F forecast.
? Elite Commercial REIT (ECR) is enjoying 100% portfolio occupancy, with active tenant engagement for FY23F leases with break options.
? Reiterate Add rating, with a slightly lower DDM-based TP of £0.76.
2H21 results highlights
ECR posted 2H21 revenue/net property income of £18.8m/£18.3m (+65.7%/+64.9% yoy), boosted mainly by contributions from new acquisitions. Excluding income from new assets, its revenue/net property income would have improved by 0.4%/0.7% yoy. Income available for distribution came in at £13.4m, translating into a DPU of 2.8 pence. For the full year, ECR delivered a DPU of 5.43 pence (+22.3% yoy), in line at 99.7% of our FY21F forecast.
High portfolio occupancy; evaluating options for FY22F expiries
ECR continued to enjoy a 100% portfolio occupancy as at end-FY21, with a long weighted average lease expiry of 6 years. It has also received in advance 99.9% of the rent due in 1Q22. Apart from the rent review of Dallas Court Units 1-2 in Salford (completed in 3Q21 with a 7% uplift in rent), ECR also indicated that it has renewed the lease for East St, Epsom, for five years from Apr 23 (break clause in the third year) and achieved an c.11% rental uplift. Two other properties — John Street, Sunderland, and Sidlaw House. Dundee — exercised their break lease options, with expiries due in Mar and Jun 2022. Management is currently evaluating various options, including disposal, re-leasing or redevelopment, for the properties. That said, these two properties make up a small c.1.2% of ECR’s portfolio as at end-FY21; impact of any income downtime are unlikely to be significant, in our view.
Active tenant engagement for FY23F leases with break options
An estimated 65.3% of its portfolio gross rental income has a break option in FY23F. Tenant DWP is required to serve at least 12 months’ notice ahead of the break to exercise the option. If the option is not exercised, the properties will be subject to a rent review, with a rental uplift based on the UK CPI. The REIT manager has been actively engaging the tenant, but no details have been provided.
Slight increase in gearing, but interest cover remains healthy
Following a loss on the revaluation of its portfolio, ECR’s gearing trended up a little to 42.4% at end-FY21, with interest coverage at a healthy 6x. An estimated 63% of ECR’s debt is on fixed rates, limiting the impact of rising interest rates. Given its relatively small portfolio size, management continues to be on a lookout for new acquisitions, both from its sponsor as well as from third parties.
Reiterate Add rating
We cut our FY22-23F DPU estimates by 1.6-2% post results. Accordingly, our DDM-based TP is lowered to £0.76. Nonetheless, ECR still offers an attractive FY22F dividend yield of c.7.6%. We like ECR’s stable income portfolio, with inbuilt growth through its inflation-linked rental structure and inorganic growth potential. Potential re-rating catalysts could come from rental uplifts for the majority of its portfolio in FY23F, while downside risks include tenant concentration exposure to the Department for Work & Pensions (DWP).